Engineering Economic Decisions Lecture No. 1

Transcript:Engineering Economic Decisions Lecture No. 1:
Engineering Economic Decisions Lecture No. 1 Chapter 1 Contemporary Engineering Economics, 6th ed. Copyright © 2016 What Is an Engineering Economic Decision? Role of engineers in business Understanding the term “engineering economic decision” An overview of a variety of engineering economic decision problems Understanding the fundamental principles of engineering economics Role of Engineers in Business Create and Design Engineering Projects Evaluate Expected Profitability Timing of Cash Flows Degree of Financial Risk Analyze Production Methods Engineering Safety Environmental Impacts Market Assessment Evaluate Impact on Financial Statements Firm’s Market Value Stock Price Engineering Economic Decisions Plan for the acquisition of equipment (capital expenditure) that will enable the firm to design and produce products economically What Makes Engineering Economic Decisions Difficult? Estimating a required investment Forecasting a product demand Estimating a selling price Estimating a manufacturing cost Estimating a product life Accounting Vs. Engineering Economy Present Future Past Engineering Economy Accounting Common Types of Strategic Engineering Economic Decisions Equipment or process selection Equipment replacement decisions New products and product expansion Cost reduction Improvement in service or quality Design decisions Fundamental Principles of Engineering Economics Principle 1: A dollar earned today is worth more than a dollar earned in the future. Principle 2: The only thing that matters is the difference between alternatives. Principle 3: Marginal revenue must exceed marginal cost. Principle 4: Additional risk is not taken without the expected additional return. Principle 1: A dollar earned today is worth more than a dollar earned in the future. Interest rate = 10% Principle 2: The only thing that matters is the difference between alternatives. Irrelevant items in decision-making Principle 3: Marginal revenue must exceed marginal cost. Manufacturing cost Sales revenue Marginal revenue Marginal cost 1 unit 1 unit Principle 4: Additional risk is not taken without the expected additional return. Two Factors in Engineering Economic Decisions Time Uncertainty